Deposit liability insurance launched for non-vessel operating carriers

The PRC International Maritime Transport Regulations, which came into effect in 2002, established a non-vessel operating carrier (NVOC) system. Under these Regulations, an NVOC is required to pay a non-vessel operating carriage deposit of RMB800,000 (US$122,000) to the Ministry of Transport as financial security, and for each branch it establishes, it is required to pay a further RMB200,000. The International Maritime Transport Regulations Implementing Rules, which came into effect in 2003, specify that the NVOC deposit is to be used to compensate for losses incurred as a result of an NVOC failing to perform or improperly performing its obligations as a carrier, or to pay fines imposed on it by a transport authority.

Financial burden eased

At the end of February this year, there were more than 3,600 NVOCs in the PRC. With the exception of qualified foreign NVOCs, which can be exempted, all other NVOCs are required, in accordance with the Regulations, to pay a deposit. The main objective of this deposit system is to protect the interests of creditors, but it has, to a certain extent, proved to be a financial burden on NVOCs.

For this reason, the Ministry of Transport introduced an NVOC deposit liability insurance system on a trial basis starting from 1 November 2010. It permits NVOCs to choose between paying the deposit and taking out deposit liability insurance. If a company that has already registered as an NVOC wishes to recover a deposit it has already paid, it may apply for a refund after executing a deposit liability insurance contract with a qualified insurer.

Insurance provider

An insurer that underwrites deposit liability insurance must be registered in the PRC and be recognized by the China Insurance Regulatory Commission. Its insurance products must have been recognized by the Ministry of Transport and approved by, or registered with, the China Insurance Regulatory Commission. It must also have signed an undertaking to underwrite non-vessel operating carrier deposit liability insurance, and must have performed its obligations in accordance with the undertaking.

To date, PICC Property and Casualty has satisfied the conditions for underwriting deposit liability insurance and has activated a special online insurance platform at www.nvoccchina.com.

Term, scope and method

The term of deposit liability insurance is to be agreed between the new applicant for NVOC status or the existing NVOC and the insurer, but may not be less than one year.

In contrast to the deposits, deposit liability insurance may only be used to cover debts arising from the NVOC’s failure to perform or improper performance of its obligations as a carrier, and cannot be used to pay administrative fines. If an NVOC is fined, it is required to pay the fine itself.

To facilitate administration, an NVOC and its branches are, in principle, required to adopt the same form of coverage against financial liability, i.e. either a deposit or deposit liability insurance.

Payment of claims

If an NVOC fails to perform or improperly performs its obligations as a carrier, the creditor is first required to try to secure a court judgment, or an arbitral award that a court has ruled enforceable and to apply to the court for enforcement. Then, the court will ask the Ministry of Transport to assist in enforcement. Once the Ministry of Transport has determined that a claim should be paid, it will notify the insurer in writing and the insurer will transfer payment to the account designated by the court.

In order to protect the creditor, the insurer may not refuse to pay a claim on the grounds that the NVOC failed to perform its obligations as specified in the insurance terms.

Surrender

If an NVOC wishes to apply to terminate its policy and cease to be an NVOC, it must apply to the Ministry of Transport in writing. The ministry will post this information on its website at www.mot.gov.cn for 30 days. If any party believes that the NVOC has failed to perform or has improperly performed its obligations as a carrier and should be liable for damages, it must obtain, during the 30-day period, a court judgment or an arbitral award that a court has ruled enforceable, and the insurer will pay the indemnity in accordance with the insurance contract.

A 30-day period seems too onerous, but the Ministry of Transport has not specified the legal consequences if a creditor fails to obtain the court judgment or arbitration award within that time. Pursuant to the general principles of the PRC Insurance Law, surrender of an insurance policy does not appear to be a sufficient condition to release an insurer from its claim liability for an insured event that occurred during the insurance term. Accordingly, the insurer may still be liable to pay.

In comparison, the provisions of the Implementing Rules are clearer and more reasonable: in the event that a creditor makes a claim on the deposit during the 30-day notice period, the Ministry of Transport will suspend the deposit refund procedure. During the notice period, the creditor is not required to secure a final court judgment or an arbitration award that has been ruled enforceable by a court.

Premiums

The formula for calculating premiums is as follows:

annual premium = liability limit × benchmark premium rate × operating revenue adjustment coefficient

PICC’s benchmark rate for deposit liability insurance premiums is 3.75%. When calculating the premiums, an adjustment coefficient for the NVOC’s operating revenue for the year is also applied. For an NVOC (with no branches) with an annual operating revenue of less than RMB10 million, the deposit liability insurance premium for one year would be RMB30,000.

Since the financial crisis, the cash flow of many shipping companies has been weak. The implementation of a deposit liability insurance system may help those companies to survive these trying times.